Cut your losses while you can as Ascent Resources collapses and cash position disintegrates (AST)

06 Aug 2018

Ascent Resources (LSE:AST) descended 40.4pc to 0.4p this morning after releasing a deeply concerning company update that raises serious questions over its future. We warned about the trouble facing Ascent back in April and it now looks like our prognosis was correct. This parrot is nearly dead. The company was clearly running out of money. The “strategic review” to find a funding partner was an obvious red herring. Despite this retail investors continued to buy the stock, in full denial of the brutal reality of what happens to a company when it runs out of cash. Even at 0.4p Ascent’s market cap is still £10million and if you think the worst is over for this company, guess again. There is plenty of downside from here.

Ever one to put a brave face on things, Ascent led this morning with news that it has made “progress” in the strategic review it launched in April to identify a larger entity to develop the next phase of its flagship Petišovci gas project in Slovenia. It said ongoing discussions are taking place with a number of different parties, adding that it is working to ‘bring matters to a satisfactory conclusion’ as soon as possible.

This seems like a lot of wishful thinking, given how perilous the company’s financial position appears to be and matters turned increasingly bleak from this point onwards in the RNS. Ascent went on to claim it has continued to face permitting delays at Petišovci, which have deterred numerous parties who would otherwise have been interested. The firm said it has been ‘increasingly frustrated’ by requests from the Slovenian Environment Agency for amendments and information and has been ‘disappointed’ by a lack of support from Slovenian politicians.

It added: ‘Until the permits (which were applied for well over one year ago) are granted, the company is unable to undertake the planned work to re-stimulate these wells let alone commence the re-entries of the other existing Pg wells.’

If the strategic review is successful, then Ascent said that these delays should not have a long-term impact is as it will have access to more significant funding. However, if the review falls through and a partner cannot be found, then it warned that permitting delays are likely to become a ‘greater problem’.

Elsewhere, Ascent revealed a month-on-month drop in its total production and average daily production in July. However, the company quickly pointed out that this drop has been offset by higher gas prices, which have allowed Petišovci to remain cash flow positive, as it has been since last November.

But Well Pg-11A underperforming and Well Pg-10 needing a workover, Ascent said that, without further permits, income from production will eventually ‘fail to cover the day-to-day costs of the group’.As we highlighted at the launch of the strategic review, the firm burned through a total of £6.75m last year, made up of c.£2.1m spent on operating activities and c.£4.7m spent on investing activities. With the help of two cash raises throughout the year, Ascent mitigated this cash burn to the tune of £4.5m in issued equity. In the headline numbers of its 2017, the organisation claimed to have had cash reserves of more than £1m as at the end of 2017. However, we can immediately discount £400,000 of this because it is restricted.

To cut these costs and strengthen its balance sheet, Ascent said today that it will stop making any investments in the future development of Petišovci. The business will also terminate any consultancy contracts not considered essential to existing production. Furthermore, to reduce cash costs at the PLC level, its non-executive directors have taken a 50pc pay cut from this month and a 100pc deferral of remuneration from August. All its other UK based staff will in future move to an ad hoc basis, providing support as required on a daily rate. Most notably, Ascent announced that chief executive Colin Hutchinson, its one full-time executive, will move into a part-time position and take a pay cut from the end of August. He will also be free to seek additional positions elsewhere.

If the strategic review fails, then the firm said these cost-cutting measures, alongside income from Pg-10 and Pg-11A, could allow it to continue trading until the end of the current year without additional funding. It added that, even when the government grants it the permits, it is likely to require funding to pay for any workovers, adding: ‘The vote by shareholders at our recent AGM against giving the Board the standard headroom to raise additional equity funding without recourse to shareholders has removed a potential source of funding to cover this gap.’

Reading through today’s RNS, one cannot help but wonder why a strategic investor would want to pump money into Ascent and its projects when the company has no cash and is being held back by licensing delays. The company’s negotiating hand is worse than feeble.

With that in mind, cynically minded investors could interpret today’s announcement as a strategic decision aimed at pre-empting the failure of the strategic review. This line of inquiry would suggest that, by offering such a negative update, Ascent hopes to scare shareholders into allowing, and participating in, a placing in a bid to hang on to some value. After all, the business can still go lower- its current £10.45m market cap looks very hefty when put against its weak financial position, struggling portfolio and seemingly poor in-country relations.

Cut your losses while you can.

Authors: Ben Turney and Daniel Flynn

Disclosure: The author of this piece does not own shares in any of the companies mentioned

The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

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